Problem 226A Jackson Company produces plastic that is used f

Problem 22-6A

Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,000 tons of plastic and sold 3,500 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,000, variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $2,800,000, and fixed administrative expenses were $500,000.

Problem 22-6A Jackson Company produces plastic that is used for injection-molding applications such as gears for small motors. In 2016, the first year of operations, Jackson produced 4,000 tons of plastic and sold 3,500 tons. In 2017, the production and sales results were exactly reversed. In each year, the selling price per ton was $2,000, variable manufacturing costs were 15% of the sales price of units produced, variable selling expenses were 10% of the selling price of units sold, fixed manufacturing costs were $2,800,000, and fixed administrative expenses were $500,000.

Solution

1. Computation of Income statement for 2016 and 2017 by using variable costing method:

2016

2017

Sales

3,500*$2,000 = $ 7,000,000

4,000*$2,000 = $ 8,000,000

Variable expenses

Variable cost of goods sold

Inventory, January 1

                    -  

         150,000

Variable manufacturing costs

    4,000*(2,000*15%)= 1,200,000

3,500*(2,000*15%)=      1,050,000

Cost of goods available for sale

     1,200,000

     1,200,000

Inventory, December 31

       500*(2,000*15%)=   150,000

                    -  

Variable cost of goods sold

     1,050,000

     1,200,000

Variable selling expenses (sales*10%)

         700,000

         800,000

Total variable expenses

     1,750,000

     2,000,000

Contribution margin

     5,250,000

     6,000,000

Fixed expenses

Manufacturing overhead

     2,800,000

     2,800,000

Administrative

         500,000

         500,000

Total fixed expenses

     3,300,000

     3,300,000

Income from operations

$ 1,950,000

$ 2,700,000

2. Computation of Income statement for 2016 and 2017 by using absorption costing method:

2016

2017

Sales

$ 7,000,000

$ 8,000,000

Cost of goods sold

Inventory, January 1

                    -  

         500,000

Cost of goods manufactured

   4,000*{(2,000*0.15)+(2,800,000/4,000)} = 4,000,000

     3,500*{(2,000*0.15)+(2,800,000/3,500)} = 3,850,000

Cost of goods available for sale

     4,000,000

     4,350,000

Inventory, December 31

      500*{(2,000*0.15)+(2,800,000/4,000)}=   500,000

                    -  

Cost of goods sold

     3,500,000

     4,350,000

Gross profit

     3,500,000

     3,650,000

Operating expenses

Selling expenses

         700,000

         800,000

Administrative expenses

         500,000

         500,000

Total operating expenses

     1,200,000

     1,300,000

Income from operations

$ 2,300,000

$ 2,350,000

3. Reconciliation:

2016

2017

Variable costing income

$ 1,950,000

$ 2,700,000

Fixed manufacturing overhead expensed with variable costing

     2,800,000

     2,800,000

Less: Fixed manufacturing overhead expensed with absorption costing

   2,800,000*3,500/4,000 = (2,450,000)

   (3,150,000)

Difference

         350,000

      (350,000)

Absorption costing income

$ 2,300,000

$ 2,350,000

				2016	2017
Sales				3,500*$2,000 = $ 7,000,000	4,000*$2,000 = $ 8,000,000
Variable expenses
Variable cost of goods sold
Inventory, January 1		-	150,000
Variable manufacturing costs	4,000*(2,000*15%)= 1,200,000	3,500*(2,000*15%)=      1,050,000
Cost of goods available for sale	1,200,000	1,200,000
Inventory, December 31		500*(2,000*15%)=   150,000	-
Variable cost of goods sold	1,050,000	1,200,000
Variable selling expenses (sales*10%)		700,000	800,000
Total variable expenses		1,750,000	2,000,000
Contribution margin		5,250,000	6,000,000
Fixed expenses
Manufacturing overhead		2,800,000	2,800,000
Administrative			500,000	500,000
Total fixed expenses		3,300,000	3,300,000
Income from operations		$ 1,950,000	$ 2,700,000